Analysts: Summer may be over, but market swings are here to stay

Rob Varnon, Staff Writer

Published 8:40 pm, Friday, September 9, 2011

Photo: Richard Drew, AP

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Traders work on the floor of the New York Stock Exchange Friday, Sept. 9, 2011. Stocks continued wild swings during the first full week in September for much of the same reasons they swung up and down in the summer: Concerns about a European debt crisis and a slowing American economy (AP Photo/Richard Drew) less

Traders work on the floor of the New York Stock Exchange Friday, Sept. 9, 2011. Stocks continued wild swings during the first full week in September for much of the same reasons they swung up and down in the ... more

Photo: Richard Drew, AP

Analysts: Summer may be over, but market swings are here to stay

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Volatile swings in the stock market will continue to occur this fall, but whether equity benchmarks trend higher depends on an ability to leave financial stocks behind.

Stocks continued wild swings during the first full week in September for much of the same reasons they swung up and down in the summer: concerns about a European debt crisis and a slowing American economy.

"If we think challenges are bad here, they are worse in Europe," said Michael Strauss, chief economist and chief investment strategist for the Wilton-based Commonfund, which manages $25 billion for colleges and foundations.

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He said southern Europe is gripped by rolling recessions, and to fix the problem, investors in sovereign debt might have to take a haircut on their loans.

"We'll have to see if we catch a cold from it," he said.

The politics in Europe over the debt problem are as bad as politics in Washington, D.C., he said, but over there, it involves nations deciding the fate of other nations. Here, it's political parties, and he said a concern remains that there are "signs of ineptness on both sides" in Washington.

The issue in American politics that could hamper an upward trend in the market is over stimulus spending, he said, versus tax hikes and spending cuts.

While that's going on, there is a question of what will rally and what won't in this climate.

"Picking stocks becomes very important," he said.

Strauss said he believes prices are moderating, but he also said certain stocks that are less dependent upon the general economic health and middle- and lower-income consumers will do better because we are in the midst of a bifurcated economy.

What's going to help is that inflation pressure will ease, he said, but that won't help people who haven't seen raises for a few years.

While this at first glance seems alarming, Strauss said what investors need to remember is companies have actually been doing better financially than the overall economy. He said earnings are coming in better than expected and it would probably make more sense to own a stock or bond from a company that has a solid balance sheet and a record of paying dividends than investing in treasuries or other sovereign debt.

"It's hard to envision a rally without financials," said Peter Chieco, a vice president in Morgan Stanley Smith Barney's Greenwich office, on why he expects continued downward pressure, at least through September.

He said September tends to be a weak month for equities overall, and the financials remain beaten down by uncertainty over regulations and the need to increase capital.

The general overall economy isn't going to help either, he said.

The unemployment rate remains high, which also cuts down economic activity.

Like Strauss, Chieco sees blue chip stocks as a better safety play in this market than bonds and cash.

What can turn it around, he said, is the proper stimulus from Washington, in the way of tax cuts for businesses.

"Right now, the market is pricing in, if not a recession, a pretty big slowdown," he said.

Over in Woodbridge, at Heritage Capital, Paul Schatz stuck with his previous take on the market, that it would remain volatile possibly even into November, though he said a bottom will occur in October.

"I think we're in this period of digesting this mini-crash from early August," Schatz said. "It looks similar to post-crash of '87 and '98 and similar to post-crash of January '08."

He said if this holds, we'll see one more decline toward the old lows in the end of September and early October. That would put the S&P 500 around 1,000 to 1,100, he said.

The issues moving the market remain the same as they were in August, he said, and new trends won't emerge until the end of fall.

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